Evaluation Solutions Failure
Evaluation Solutions, LLC: The Anatomy of an AMC’s Failure and Why Lender’s Should Care
Last week, I had the pleasure of speaking to the Collateral Risk Network about lender oversight of appraisal management companies. With that exciting topic as my general theme, I chose to address the specific issue of AMCs failing to pay independent contractor appraisers for appraisals ordered by the lender-client (and also failing to pay agents and brokers for BPOs). This issue has been brought to the forefront of many appraisers’ minds and bank accounts by the recent failure of two large AMCs: National Real Estate Information Services (NREIS) and Evaluation Solutions, LLC.
The failure of Evaluation Solutions provides an interesting look at the anatomy of an AMC’s downfall and bankruptcy. Evaluation Solutions filed a Chapter 7 Bankruptcy Petition on January 25, 2013 in Florida. The AMC had signaled that it would file for bankruptcy in December, when it was widely reported to have lost its biggest client JPMorgan Chase Bank.
Here are some of the interesting points I gleaned from reading the bankuptcy petition filed by Evaluation Solutions (“ES”) — all 231 pages of it:
- The biggest asset listed by Evaluation Solutions (other than an intercompany accounting entry for its subsidiary ES Appraisal Services) is an “accounts receivable due from JPMorgan Chase Bank” in the amount of $2,372,648 as of 1/8/13.
- Possibly portending a future legal action, Evaluation Solutions also lists a contingent claim as an asset that is described as “potential claim against JPMorgan Chase Bank, N.A. for breach of contract, unfair business practices.” The value is listed as “unkown.” Here’s the description of that potential claim in the petition:
- Other than the receivable from JPMorgan Chase Bank and potential legal claim, this bankruptcy case is essentially a “no asset” bankruptcy filing — meaning there will be no substantial assets to satisfy any creditors and almost certainly no assets left over to pay the unsecured claims of appraisers.
- Further, even if there were substantial assets available, a secured lender named Summit Financial Resources is identified as having a lien on the company’s assets, including the receivable from JPMorgan Chase Bank. The amount of Summit’s lien is $2,213,826. Summit is not a regular bank lender, however. It specializes in high risk asset-based lending and accounts receivable factoring. Here is the description of that debt and lien:
- As for unpaid appraisers and unpaid agents and brokers, the total of unpaid fees listed by ES in its bankruptcy petition is $9,349,612.97. That is the grand total owed to vendors. It is important to note that these debts are unsecured — to put it bluntly, if you are owed money by ES as an appraiser, I would not expect any funds to come your way as a result of the bankruptcy liquidation process. The more likely route for recovery will be from the lender you identified in your report as the client and whose behalf the appraisal was ordered. The $9 million debt to appraisers and agents/brokers is a remarkable sum because it probably represents about the amount of money that Evaluation Solutions appraisal owes for appraisal and BPO services for a six-month period. It also dwarfs the $2.3 million that ES says it is owed by Chase. Clearly, the money went somewhere — but not to appraisers or other vendors.
- Each and every appraiser (and agent/broker) owed money is listed alphabetically by name and amount owed in a schedule to the bankruptcy petition. Here is a page from the middle of the 192-page schedule of unpaid vendors:
- Another interesting fact from the petition: ES listed its gross income (before payments to subcontractors and other expenses) for 2012 as $24,046,294.
- Finally, one thing that many unpaid appraisers would never expect is the potential impact of something called a “preferential transfer.” Under bankruptcy law, a “preference” or “preferential transfer” is a transfer of money by the bankrupt company to a creditor shortly before the filing of a bankruptcy case. For regular creditors, the period is 90 days before the petition is filed. The creditor receiving money in that period is assumed to have been given preferential treatment by the debtor because that creditor got paid, but others did not. Thus, to promote equal bankruptcy distributions among all creditors, bankruptcy law allows the bankruptcy trustee to recover preferential transfers from those creditors to bring that money back into the bankruptcy estate to spread among all creditors in order of their legal priority. What does this mean for appraisers? If you received more than $5,000 in payment from Evaluation Solutions in the 90 days before it filed for bankruptcy (there is a schedule of such recipients attached to the petition), you might be demanded by a bankruptcy trustee to repay that money or be sued for it. There are defenses to such claims, but it is always a shock to vendors like appraisers to be demanded to repay money they received from a bankrupt lender or company — and I have seen it happen to appraisers.
That brings me to the main point of the presentation I made to Joan Trice’s CRN group. Why should a lender care about appraisers not being paid by an AMC? There is an obvious moral reason — the managers and owners of any business should care that the vendors of services to that business are paid for the services they provide. Leaving that big reason aside, I explained to the group that there are practical reasons why lenders should care and pay more attention to whether the AMCs they use are actually paying their panel appraisers — namely, lenders should care because the potential consequences to them from AMC non-payment include:
- Dealing with thousands of panel appraisers demanding millions in unpaid fees.
- Difficulties caused with borrower relationships when some of the unpaid appraisers begin contacting borrowers (and/or, in a few cases, actually filing liens against the borrowers’ properties — which is a practice that I do not advise appraisers should take).
- Administrative complaints filed by unpaid appraisers to regulators such as the OCC.
- Legal actions by appraisers to collect from the lender — and, sooner or later, an entrepreneurial attorney is going to realize that the subject of unpaid appraiser fees for appraisals delivered to a large lender-client might make a fruitful claim for a class action.
- The lender being forced to pay twice for appraisals — once to the AMC and then again to the appraisers.
- Loss of goodwill with appraisers at a time when appraisal fees appear to be increasing and when some lenders/AMCs are challenged to retain good appraisers in some areas of the country.
And, I did bring up the specter that under Dodd-Frank, it is the lenders’ duty to “compensate fee appraisers at a rate that is customary and reasonable” and that a regulator or attorney general might well agree that zero compensation received by the appraiser cannot be justified under either presumption for establishing customary and reasonable fees under Dodd-Frank rules.
The goods news for appraisers, but not some AMCs, is that a few lenders are starting to get smarter about the risks they face. I am seeing this firsthand in some of the service agreements between lenders and AMCs. One thing I am seeing is lenders requiring audited or sworn financial statements of AMCs in order to vet their financial stability. I have seen contractual provisions implementing periodic reporting by the AMC to the lender of the payment status to independent contractor appraisers. I am also seeing provisions by which the lender requires payment to appraisers within a certain number of days of the lender’s payment to the AMC and, in one case, a requirement for a segregated payment account.
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This article is packed with invaluable information. Thanks for writing it!
Is it any surprise that many AMCs were formed by the owners of once large preditory mortgage companies. NovaStars was one of many that quickly saw the gold in them thar AMC hills.
Now that their vein of gold is running out the easiest way to steal the gold is declaring bankruptcy. The smart conceal the gold and take bankruptcy knowing nobody will come after them. Worst case; they’ll pay a fine. The smart ones (early ones) walked away unscathed. As more and more try to run the same play however they tip off politicians who have an agenda of their own.
No worries AMCs. There are a thousand ways to skin an appraiser. As long as you have his billiards in a vice he is willing to feed you for life. Another AMC owner will soon discover the next big play for hiding the gold.